1/06/2009 @ 6:40AM

Gazprom's Tactics Harsh But Its Logic Sound

The security of Europe’s gas supplies, already tenuous amid the dispute between Russian natural gas company Gazprom and Ukraine, has been “deteriorating dramatically,” an EU spokesman stated on Tuesday. Bulgaria’s economic ministry confirmed that all supplies through Ukraine had been suspended and warned of a similar situation in Turkey, Greece and Macedonia.

Russia, which cut off Ukraine’s own supplies on New Year’s Day because of a dispute over prices, said Monday that it would be reducing supplies to Ukraine bound for European consumers. It accused Kiev of siphoning off some 65.3 million cubic meters of gas destined for the rest of Europe since Jan. 1.

Moscow’s heavy-handed tactics and its timing–coinciding with temperatures plummeting below minus 10 degrees Celsius (18 Fahrenheit) in many parts of the European mainland–will not do any favors for the Russian bear’s international image. Still,
Gazprom
does seem to have a point when it comes to raising gas prices.

Societe Generale analyst Thierry Bros pointed out that the $2.0 billion of payments owned to Gazprom by Ukraine represents 2.0% of the company’s market capitalization. He added that the situation has changed significantly since the last dispute between Russia and Ukraine, in 2006. The Central Asian states of Uzbekistan, Kazakhstan and Turkmenistan, which now supply Russia with much of the gas it sells on to countries such as Ukraine, have raised the prices they charge Gazprom.

Even though some of the gas comes from Russia itself, Bros estimated that, after adding transit costs, Gazprom must sell the Central Asian gas for more than $340 per 1,000 cubic meters to make a profit on it. Given the $179.50 per 1,000 cubic meters currently being paid by Ukraine, the $200.0 to $450.0 now being demanded by Russian seem less than outrageous. To put it in context, friendlier Russian neighbors such as Belarus get their gas for $200.0, while the Baltic countries and Turkey pay $366.0, and some utility companies in Western Europe (France and Germany) were paying $500.0 according to Gazprom’s latest figures.

That is one reason why the European Union, while urging the two sides to reach a solution as it held talks with Gazprom on Tuesday, has tried to remain neutral through the situation. For once, the situation points not to the problem of reliance on Russian gas but on that of using a single main route–via Ukraine–for the transportation of that gas.